Freelancers, contractors, consultants, remote employees – with the ever-growing flexible workforce there are now many different categories of workers that your company can leverage to help your business grow and reach those important productivity goals. As these types of workers grow in numbers across the economy, the associated laws and rules have been getting increasingly complicated. They differ from state to state and sometimes even county to county. As a business, you’re at risk of misclassifying these workers which can result in some pretty hefty penalties. How do businesses ensure that they are following all of these new regulations?
The solution lays within EOR’s (Employer of Record) and AOR’s (Agent of Record). They are both talent management services that ensure compliance for workers, but they differ from each other in specific ways. These terms may seem complicated but by breaking down a few key differences hopefully we can help you determine which is best for your business. To begin, one of the key differences is which type of workers your business is looking to engage. With that being said, it’s important to understand the difference between W-2 employees and 1099 Contractors.
W2 Employees vs 1099 Contractors
W-2 Employees are traditional employees that work for a company. Their employer withholds taxes, Social Security, and Medicare from their paychecks throughout the year. At the end of the year their employers send them a W-2 form that explains all of their earnings and amounts withheld. Being an employee essentially means the business decides when, where and how they work. The relationship between the worker and the business plays a very large role in this classification.
These W-2 employees vastly differ from a 1099 or an independent contractor. These individuals providing services to a business but they are not considered employees. They choose who they would like to work for, they decide which hours they would like to work, and don’t receive benefits from the business. At the end of the year, they receive a 1099 from each business they worked for during the year. These businesses don’t withhold any taxes from their payments because the contractors are responsible for paying the amounts on their own (including income tax and self-employment tax).
The differences in these classifications can be very nuanced and just this year, the U.S. Department of Labor has handed down a new rule that will change how companies classify their independent workers this year. According to the new requirements, workers will now be considered W-2 employees when they are “economically dependent” on a company or “their work is an integral part of the employer’s business”. The Labor Department has said the rule was designed to crack down on industries and companies where misclassification of workers is common. To read more about these differences check out information provided by the IRS.
Employer of Record vs Agent of Record: EOR vs AOR
Now why does this make a difference in choosing between EOR and an AOR? EOR’s are utilized to manage W-2 employees while AOR’s are utilized to engage with 1099 independent contractors. Although they offer very similar services, these services are used for different types of workers.
When a business engages an EOR, the EOR becomes the legal employer of their workers. This means that they take on all the risk associated with the workers (employment laws, non-compliance). They also take care of payroll, HR functions, benefits, taxes, and much more. By engaging an EOR, your business can expand its workforce into new markets where you may not have a legal entity established yet (saving you the cost and the effort). Essentially, an EOR handles the entire employment relationship, allowing your company to focus on business activities.
On the other hand, an AOR acts as more of a facilitator between your business and workers – they do not become the legal employer of the workers. Without this, they are still able to help with worker classification, payroll, and compliance just. They essentially assume responsibility for the tasks necessary to work with contractors, alleviating your business of the burden.
Regardless of the type of worker you’re looking to engage, AllWork offers the services needed. We make sure that your workers will always be classified and paid correctly. Alongside our classification services, we also offer top-tier HR services to help you onboard your employees without the administrative burden. This all comes in combination with our integrated management software that will truly unlock the potential of your business’s efficiency.
Ready to learn more about AllWork’s services? Reach out today! Email info@allworknow.com or schedule a demo here to get started!
